Lecture 11 - Project Risk Management PDF

Project Planning & Management
Lecture 11
Project Risk Management
The Importance of Project Risk
Management
• PMBOK definition of Project Risk
– An uncertain event or condition that, if it occurs, has a
positive or negative effect on the project objectives.
• Project risk management is the art and science of identifying,
analyzing, and responding to risk throughout the life of a
project and in the best interests of meeting project objectives.
• Risk management is often overlooked in projects, but it can
help improve project success by helping select good projects,
determining project scope, and developing realistic estimates.
Research Shows Need to Improve
• Study by Ibbs and Kwak shows risk has the
lowest maturity rating of all knowledge areas.
• KLCI study shows the benefits of following
good software risk management practices.
• KPMG study found that 55 percent of
runaway projects—projects that have
significant cost or schedule overruns—did no
risk management at all.*
*Cole, Andy, “Runaway Projects—Cause and Effects,” Software World, Vol. 26, no. 3, pp. 3–5
(1995).
Table 11‐1. Project Management Maturity
by Industry Group and Knowledge Area*
KEY: 1 = LOWEST MATURITY RATING 5 = HIGHEST MATURITY RATING
Engineering/ Telecommunications Informatio Hi‐Tech

Knowledge Area Construction n Systems Manufacturing
Scope 3.52 3.45 3.25 3.37
Time 3.55 3.41 3.03 3.50
Cost 3.74 3.22 3.20 3.97
Quality 2.91 3.22 2.88 3.26
Human 3.18 3.20 2.93 3.18
Resources
Communications 3.53 3.53 3.21 3.48
Risk 2.93 2.87 2.75 2.76
Procurement 3.33 3.01 2.91 3.33
*Ibbs, C. William and Young Hoon Kwak. “Assessing Project Management Maturity,”
Project Management Journal (March 2000).
Figure 11‐1. Benefits from Software
Risk Management Practices*
100%
80%
80%
60%
60% 47% 47% 43%
40% 35%
20% 6%
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*Kulik, Peter and Catherine Weber, “Software Risk Management Practices – 2001,”
KLCI Research Group (August 2001).
Negative Risk
• A dictionary definition of risk is “the possibility
of loss or injury.”
• Negative risk involves understanding potential
problems that might occur in the project and
how they might impede project success.
• Negative risk management is like a form of
insurance; it is an investment.
Risk Can Be Positive
• Positive risks are risks that result in good
things happening; sometimes called
opportunities.
• A general definition of project risk is an
uncertainty that can have a negative or
positive effect on meeting project objectives.
• The goal of project risk management is to
minimize potential negative risks while
maximizing potential positive risks.
Risk Utility
• Risk utility or risk tolerance is the amount of
satisfaction or pleasure received from a
potential payoff.
– Utility rises at a decreasing rate for people who
are risk‐averse.
– Those who are risk‐seeking have a higher
tolerance for risk and their satisfaction increases
when more payoff is at stake.
– The risk‐neutral approach achieves a balance
between risk and payoff.
Figure 11‐2. Risk Utility Function
and Risk Preference
Processes
• Risk management planning: Deciding how to
approach and plan the risk management
activities for the project.
• Risk identification: Determining which risks are
likely to affect a project and documenting the
characteristics of each.
• Qualitative risk analysis: Prioritizing risks based
on their probability and impact of occurrence.
Processes (cont’d)
• Quantitative risk analysis: Numerically estimating the
effects of risks on project objectives.
• Risk response planning: Taking steps to enhance
opportunities and reduce threats to meeting project
objectives.
• Risk monitoring and control: Monitoring identified
and residual risks, identifying new risks, carrying out
risk response plans, and evaluating the effectiveness
of risk strategies throughout the life of the project.
Risk Management Planning
• The main output of risk management planning
is a risk management plan—a plan that
documents the procedures for managing risk
throughout a project.
• The project team should review project
documents and understand the organization’s
and the sponsor’s approaches to risk.
• The level of detail will vary with the needs of
the project.
Table 11‐2. Topics Addressed in a
Risk Management Plan
• Methodology
• Roles and responsibilities
• Budget and schedule
• Risk categories
• Risk probability and impact
• Risk documentation
Contingency and Fallback Plans,
Contingency Reserves
• Contingency plans are predefined actions that the
project team will take if an identified risk event occurs.
• Fallback plans are developed for risks that have a high
impact on meeting project objectives, and are put into
effect if attempts to reduce the risk are not effective.
• Contingency reserves or allowances are provisions
held by the project sponsor or organization to reduce
the risk of cost or schedule overruns to an acceptable
level.
Common Sources of Risk in
Information Technology Projects
• Several studies show that IT projects share
some common sources of risk.
• The Standish Group developed an IT success
potential scoring sheet based on potential risks.
• Other broad categories of risk help identify
potential risks.
Table 11‐3. Information Technology
Success Potential Scoring Sheet
Success Criterion Relative Importance
User Involvement 19
Executive Management support 16
Clear Statement of Requirements 15
Proper Planning 11
Realistic Expectations 10
Smaller Project Milestones 9
Competent Staff 8
Ownership 6
Clear Visions and Objectives 3
Hard-Working, Focused Staff 3
Total 100
Broad Categories of Risk
• Market risk
– If the IT project is to produce a new product or service, will it
be useful to the organization or marketable to other?
– Will user accept and use the product or service?
– Will someone else create a better product or service faster?
• Financial risk
– Can organization afford to undertake the project?
– How confident are stakeholders in the financial projections?
– Will the project meet NPV, ROI, and payback estimates?
• Technology risk
– Is the project technically feasible?
– Will it use mature, leading edge, or bleeding edge technologies
– Will hardware, software, and networks function properly?
– Will the technology be available in time to meet project objectives?
Broad Categories of Risk
• People risk
– Does the organization have or can they find people with
appropriate skills to complete the project successfully?
– Do people have the proper managerial and technical skills?
– Do they have enough experience?
– Does senior management support the project?
• Structure/process risk
– What is the degree of change the new project will
introduce into user areas and business procedure?
– How many distinct user groups does the project need to
satisfy?
– Does the organization have processes in place to complete
the project successfully?
Risk Breakdown Structure
• A risk breakdown structure is a hierarchy of
potential risk categories for a project.
• Similar to a work breakdown structure but
used to identify and categorize risks.
Figure 11‐3. Sample Risk Breakdown
Structure
IT Project
Project
Business Technical Organizational
Management
Executive
Competitors Hardware Estimates
support
Suppliers Software User support Communication
Cash flow Network Team support Resources

Table 11‐4. Potential Negative Risk Conditions
Associated With Each Knowledge Area
Knowledge Area Risk Conditions
Integration Inadequate planning; poor resource allocation; poor integration
management; lack of post-project review
Scope Poor definition of scope or work packages; incomplete definition
of quality requirements; inadequate scope control
Time Errors in estimating time or resource availability; poor allocation
and management of float; early release of competitive products
Cost Estimating errors; inadequate productivity, cost, change, or
contingency control; poor maintenance, security, purchasing, etc.
Quality Poor attitude toward quality; substandard
design/materials/workmanship; inadequate quality assurance
program
Human Resources Poor conflict management; poor project organization and
definition of responsibilities; absence of leadership
Communications Carelessness in planning or communicating; lack of consultation
with key stakeholders
Risk Ignoring risk; unclear assignment of risk; poor insurance
management
Procurement Unenforceable conditions or contract clauses; adversarial relations
Risk Identification
• Risk identification is the process of
understanding what potential events might
hurt or enhance a particular project.
• Risk identification tools and techniques include:
– Brainstorming
– The Delphi Technique
– Nominal Group Technique
– Interviewing
– SWOT analysis
– Cause and Effect Diagram
Brainstorming
• Brainstorming is a technique by which a group
attempts to generate ideas or find a solution for a
specific problem by amassing ideas spontaneously and
without judgment.
• An experienced facilitator should run the
brainstorming session.
• Be careful not to overuse or misuse brainstorming.
– Psychology literature shows that individuals
produce a greater number of ideas working alone
than they do through brainstorming in small, face‐
to‐face groups.
– Group effects often inhibit idea generation.
Delphi Technique
• The Delphi Technique is used to derive a
consensus among a panel of experts who
make predictions about future developments.
• Provides independent and anonymous input
regarding future events.
• Uses repeated rounds of questioning and
written responses and avoids the biasing
effects possible in oral methods, such as
brainstorming.
Nominal Group Technique (NGT)
a. Each individual silently writes her or his ideas on a piece of
paper
b. Each idea is then written on a board or flip chart one at a time
in a round‐robin fashion until each individual has listed all of
his or her ideas.
c. The group then discusses and clarifies each of the ideas.
d. Each individual then silently ranks and prioritizes the ideas.
e. The group then discusses the rankings and priorities of the
ideas.
f. Each individual ranks and prioritizes the ideas again.
g. The rankings and prioritizations are then summarized for the
group.
Interviewing
• Interviewing is a fact‐finding technique for
collecting information in face‐to‐face, phone,
e‐mail, or instant‐messaging discussions.
• Interviewing people with similar project
experience is an important tool for identifying
potential risks.
SWOT Analysis
• SWOT analysis
(strengths, weaknesses,
opportunities, and
threats) can also be
used during risk
identification.
• Helps identify the broad
negative and positive
risks that apply to a
project.
Cause and Effect Diagram
Risk Register
• The main output of the risk identification process is a
list of identified risks and other information needed
to begin creating a risk register.
• A risk register is:
– A document that contains the results of various risk
management processes and that is often displayed in a
table or spreadsheet format.
– A tool for documenting potential risk events and related
information.
• Risk events refer to specific, uncertain events that
may occur to the detriment or enhancement of the
project.
Risk Register Contents
• An identification number for each risk event.
• A rank for each risk event.
• The name of each risk event.
• A description of each risk event.
• The category under which each risk event
falls.
• The root cause of each risk.
Risk Register Contents (cont’d)
• Triggers for each risk; triggers are indicators
or symptoms of actual risk events.
• Potential responses to each risk.
• The risk owner or person who will own or
take responsibility for each risk.
• The probability and impact of each risk
occurring.
• The status of each risk.
Table 11‐5. Sample Risk Register
No. Rank Risk Descriptio Categor Root Triggers Potential Risk Probabilit Impac Statu
n y Cause Responses Owner y t s
R44 1
R21 2
R7 3
Qualitative Risk Analysis
• Assess the likelihood and impact of
identified risks to determine their
magnitude and priority.
• Risk quantification tools and techniques
include:
– Probability/impact matrixes
– The Top Ten Risk Item Tracking
– Expert judgment
Probability/Impact Matrix
• A probability/impact matrix or chart lists the
relative probability of a risk occurring on one
side of a matrix or axis on a chart and the
relative impact of the risk occurring on the
other.
• List the risks and then label each one as high,
medium, or low in terms of its probability of
occurrence and its impact if it did occur.
• Can also calculate risk factors:
– Numbers that represent the overall risk of specific events
based on their probability of occurring and the
consequences to the project if they do occur.
Figure 11‐4. Sample
Probability/Impact Matrix
Table 11‐6. Sample Probability/Impact
Matrix for Qualitative Risk Assessment
Figure 11‐5. Chart Showing High‐, Medium‐
, and Low‐Risk Technologies
Top Ten Risk Item Tracking
• Top Ten Risk Item Tracking is a qualitative
risk analysis tool that helps to identify risks
and maintain an awareness of risks
throughout the life of a project.
• Establish a periodic review of the top ten
project risk items.
• List the current ranking, previous ranking,
number of times the risk appears on the list
over a period of time, and a summary of
progress made in resolving the risk item.
Table 11‐7. Example of Top Ten Risk Item
Tracking
Monthly Ranking
Risk Item This Last Number Risk Resolution
of Months Progress
Month Month
Inadequate 1 2 4 Working on revising the
planning entire project plan
Poor definition 2 3 3 Holding meetings with
of scope project customer and
sponsor to clarify scope
Absence of 3 1 2 Just assigned a new
leadership project manager to lead
the project after old one
quit
Poor cost 4 4 3 Revising cost estimates
estimates
Poor time 5 5 3 Revising schedule
estimates estimates
Expert Judgment
• Many organizations rely on the intuitive
feelings and past experience of experts to
help identify potential project risks.
• Experts can categorize risks as high, medium,
or low with or without more sophisticated
techniques.
• Can also help create and monitor a watch list,
a list of risks that are low priority, but are still
identified as potential risks.
Quantitative Risk Analysis
• Often follows qualitative risk analysis, but
both can be done together.
• Large, complex projects involving leading edge
technologies often require extensive
quantitative risk analysis.
• Main techniques include:
– Decision tree analysis
– Simulation
– Sensitivity analysis
Decision Trees and Expected
Monetary Value (EMV)
• A decision tree is a diagramming analysis
technique used to help select the best course of
action in situations in which future outcomes
are uncertain.
• Estimated monetary value (EMV) is the
product of a risk event probability and the risk
event’s monetary value.
• You can draw a decision tree to help find the
EMV.
Figure 11‐6. Expected Monetary
Value (EMV) Example
Simulation
• Simulation uses a representation or model of a
system to analyze the expected behavior or
performance of the system.
• Monte Carlo analysis simulates a model’s
outcome many times to provide a statistical
distribution of the calculated results.
• To use a Monte Carlo simulation, you must
have three estimates (most likely, pessimistic,
and optimistic) plus an estimate of the
likelihood of the estimate being between the
most likely and optimistic values.
Steps of a Monte Carlo Analysis
1. Assess the range for the variables being
considered.
2. Determine the probability distribution of each
variable.
3. For each variable, select a random value based
on the probability distribution.
4. Run a deterministic analysis or one pass
through the model.
5. Repeat steps 3 and 4 many times to obtain the
probability distribution of the model’s results.
Figure 11‐7. Sample Monte Carlo
Simulation Results for Project Schedule
Sensitivity Analysis
• Sensitivity analysis is a technique used to show
the effects of changing one or more variables on
an outcome.
• For example, many people use it to determine
what the monthly payments for a loan will be
given different interest rates or periods of the
loan, or for determining break‐even points
based on different assumptions.
• Spreadsheet software, such as Excel, is a
common tool for performing sensitivity analysis.
Figure 11‐8. Sample Sensitivity Analysis for
Determining Break‐Even Point
Risk Response Planning
• After identifying and quantifying risks, you
must decide how to respond to them.
• Four main response strategies for negative
risks:
– Risk avoidance
– Risk acceptance
– Risk transference
– Risk mitigation
Table 11‐8. General Risk Mitigation Strategies
for Technical, Cost, and Schedule Risks
Response Strategies for Positive
Risks
• Risk exploitation: doing whatever you can to
make sure the positive risk happens.
• Risk sharing: allocating ownership of the risk to
another party.
• Risk enhancement: changing the size of the
opportunity by identifying and maximizing key
drivers of the positive risk.
• Risk acceptance: the project team cannot or
choose not to take any action toward a risk.
Risk Monitoring and Control
• Monitoring risks involves knowing their status.
• Workarounds are unplanned responses to risk
events that must be done when there are no
contingency plans.
• Main outputs of risk monitoring and control
are:
– Requested changes.
– Recommended corrective and preventive actions.
– Updates to the risk register, project management
plan, and organizational process assets.
Risk Monitoring and Control
• Tools for monitoring and controlling project
risk
– Risk Audits by external people
– Risk Reviews by internal team members
– Risk Status Meetings and Reports
Using Software to Assist in Project Risk
Management
• Risk registers can be created in a simple Word
or Excel file or as part of a database.
• More sophisticated risk management software,
such as Monte Carlo simulation tools, help in
analyzing project risks.
• The PMI Risk Specific Interest Group’s Web site
at www.risksig.com has a detailed list of
software products to assist in risk management.
Results of Good Project Risk
Management
• Unlike crisis management, good project risk
management often goes unnoticed.
• Well‐run projects appear to be almost
effortless, but a lot of work goes into running a
project well.
• Project managers should strive to make their
jobs look easy to reflect the results of well‐run
projects.
Summary
• Project risk management is the art and
science of identifying, analyzing, and
responding to risk throughout the life of a
project and in the best interests of meeting
project objectives.
• Main processes include:
– Risk management planning
– Risk identification
– Qualitative risk analysis
– Quantitative risk analysis
– Risk response planning
– Risk monitoring and control

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Project Planning & Management

Engineering/ Telecommunications Informatio Hi‐Tech

Suppliers Software User support Communication

Cash flow Network Team support Resources

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